Thursday, 28 December 2017

Gold and Crude Examples of How Markets Play Trader with Traps

There're many ways where markets screw with traders. One of such a way is through the use of traps. The traps looking like the markets sticking their tongues at you, taunting you (see 2 charts below).

Miss Market taunts you by sticking out her tongue

 Energy Trap 
When i wrote in my post (dated 19 July) Crude Oil Price Bottoms 2017? about a double bottoms in XLE, this signals a trend reversal in crude / energy complex.

XLE etf chart showing trend lines and bull and bear traps
XLE etf chart showing trend lines and trap (aka tongue)
(Click image to enlarge)

It did give a tradeable bounce just as i pointed out. I wasn't sure that the double bottoms signal the start of the trend reversal for crude. As it turns out, the double bottoms did signal the trend reversal, but not before it reverses sharply (marked by "Oh no!") on the chart to the downside.

After this plunge from "Oh no!", it traps the bulls (like yours truly) who are thinking that this is the start of reversal, but then it reverses just as quickly to trap the bears, who are thinking that the bearish trend continues especially when it falls back below the double-bottoms as well as the down trend line. Both bulls and bears lost money in this V-shaped trap.

That's why i label the V-shaped price formation as Trader's Trap, and not bull nor bear trap because it traps both:  first the bulls and then the bears.

 Gold Trap 
Of course, crude oil isn't the market that makes life miserable for traders. In fact, gold market loves this sort of traps even more, causing the gold traders' heads to spin like Linda Blair in The Exorcist (1973). (I won't repeat her/the Devil's profanities).

Gold chart showing trend lines and bull and bear traps
Gold chart showing trend lines and traps (aka tongues)
(Click image to enlarge)

Time again and again, the gold price just drops below the trend line, making bulls give up and bears all excited, and just as quickly it reverses direction sharply and makes new high, causing the excited bears shaking their heads in defeat. The market likes to make you pay, nor making your trading life easy.

It certain has made a fool out of me when i wrote the article Gold Lining Up behind the Gate for a Breakout (dated 22 Nov) when i expected price to break out of $1300 level, the market was then up to its old trick once again by dropping its price below the uptrend line to create a trap.

Is price action of the next few months going to repeat the July - September price actions? In other words, after price drops below the trend line and getting the bears all excited, and only reverses suddenly and sharply and making new high?

If it repeats the price action of July trap, it should at least break above $1300 level, and then proceed to make higher high (above $1360).

I feel this is a high probability event given that the 1st 6 months is a gold's strong season.

Today (28 Dec), the price has already moved back above the uptrend line that hangs the trap / tongue. RSI tells me that the gold price is bullish and likely to break above the green line ($1300).

U.S. Dollar Index (DXY) is developing a H&S formation (as well as Bitcoin).

If DXY breaks below 90.5 cents, gold bull market is assured (at least, a move above $1380 is highly likely).

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